Documents considered by the Committee on 15 December 2010 - European Scrutiny Committee Contents

4 EU Budget Review

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Commission Communication: The EU Budget Review

Legal base



Document originated

19 October 2010

Deposited in Parliament

22 October 2010

Department

HM Treasury

Basis of consideration

EM of 22 November 2010

Previous Committee Report

None

To be discussed in Council

Not known

Committee's assessment

Politically important

Committee's decision

For debate in European Committee B

Background

4.1 There are three instruments setting the basic
rules for the EU's finances. The first is an Inter-Institutional
Agreement on budgetary discipline and sound financial management,
which provides for many aspects of the planning, preparation,
execution and control of the EU Budget. The agreement is between
the Council, the European Parliament and the Commission 
it has no legal base but is politically binding. It is an important
tool of budgetary discipline and includes a multiannual Financial
Framework. The Financial Framework is intended to ensure that,
in the medium term, EU expenditure develops in an orderly manner
and within the limits of Own Resources. It contributes to budgetary
discipline by setting ceilings on the amount of funds available
to the EU Budget in broad policy areas for each year it covers.
The current Inter-Institutional Agreement was agreed in May 2006
and its Financial Framework (agreed in December 2005) sets spending
ceilings for the period 2007-2013.[16]

4.2 The other two instruments are an Own Resources
Decision, which governs the main sources of revenue  the
current Decision was agreed in June 2007,[17]
and the Financial Regulation of 2002, which sets out detailed
provisions in relation to the preparation and management of the
annual EU Budget.[18]

4.3 In December 2005 the European Council asked the
Commission to "undertake a full, wide ranging review covering
all aspects of EU spending, including the CAP, and of resources,
including the United Kingdom rebate, to report in 2008/9".
This request was incorporated into the current Inter-Institutional
Agreement. Although the Commission initiated a public consultation
on the issues in September 2007[19]
it did not report on the review in 2008 or 2009.

The document

4.4 This Communication and the
accompanying staff working document are an attempt by the Commission
to provide orientations for the future of EU budget expenditure
and financing. The Commission says that throughout the EU difficult
choices are being made and public spending is being challenged
in a way not seen for decades and that its priority for public
spending is growth for jobs, concentrating on getting more people
in jobs, boosting companies' competitiveness and building an open
and modern single market.

4.5 The Commission asserts that the key lessons to
be learnt from the EU's present budgetary arrangements are:

while the multiannual Financial Frameworks provide
predictability of EU expenditure in the medium term, this has
come at the price of inflexibility;

unforeseen events, such as the economic crisis,
underline the interdependence of the EU's economies and the need
to strengthen common rules, possibly linking sanctions to the
EU Budget;

slow take up of cohesion spending in the first
years of the Financial framework needs remedy;

controls have a tendency to assess programmes
on the basis of inputs rather than performance, reducing incentives
for effective results; and

domination of the grants approach may have limited
the impact of the EU Budget.

4.6 The Commission suggests as
principles for the EU Budget:

the weight of spending should mirror the EU's
core policy priorities and should also reflect new policy dimensions
of the Treaty of Lisbon. Above all, it should be designed as one
of the most important instruments to help deliver the Europe 2020
strategy[20] for smart,
sustainable and inclusive growth;

EU added value is a key test to justify spending
at the EU level, although the added value of a political project
cannot be reduced to a balance sheet. Coordination between EU
and national budgets should be seen as crucial for the sake of
improving economic governance, transparency and efficiency of
public spending;

spending programmes must have a real impact,
with investment feeding through into action  incentives
and checks must be in place to ensure that spending fulfils its
real purpose;

the EU Budget is an indispensible part of the
expression of EU solidarity. Solidarity is a core principle and
source of strength that confers benefits on all; and

reforming the financing of the EU Budget to re-establish
the link between own resources and common EU policies. Financing
should be realigned with the principles of autonomy, transparency
and fairness.

4.7 In the third section of the
Communication the Commission sets out its ideas in relation to
the Europe 2020 objectives of smart, sustainable and inclusive
growth. Under smart growth the Commission says on research and
innovation that:

the priority for funding should go to the EU's
core objectives and in particular the Europe 2020 strategy;

research and innovation offer high social benefits
and clear EU added value through economies of scale and coordination;

small amounts of budget funding can be successful
at leveraging private investment, such as the Risk-sharing Finance
Facility[21] and public-private
partnerships;

European Innovation Partnerships[22]
will be launched to accelerate research, pool resources and boost
EU competitiveness; and

it is important to create a genuinely unified
European Research Area, raise the quality of research infrastructure,
simplify the administrative burden and review existing education
and training programmes.

And in relation to infrastructure the Commission
says that market failures mean projects with high EU value added
fail to attract investment and that targeted financial support
can help kick-start projects with high EU added value and good
commercial potential in the long run.

4.8 Under sustainable growth
the Commission says that tackling resource efficiency, climate
change and energy security and efficiency are core objectives
of the Europe 2020 strategy and that mainstreaming these priorities
into different programmes may be more effective than creation
of a dedicated fund. On the Common Agriculture Policy (CAP) it
says that:

continuing the trend of CAP's falling share of
the total budget will still leave agriculture representing a major
public investment;

reforms have brought the CAP closer to the market
and helped deliver food security, better management of natural
resources and stable rural communities;

there is a case for progressively converging
payments levels across Member States;

further reforms could support stronger environmental
practices, foster a competitive and innovative agricultural sector,
more reliance on the market to deal with shocks and better integration
of rural development alongside other EU policies; and

more radical reform would transfer funding from
income support and market measures to support climate change and
environment objectives.

4.9 Under inclusive growth the
Commission says:

cohesion policy stimulates growth in the least
prosperous regions and catalyses change in all regions, the Europe
2020 strategy provides a clear framework to identify cohesion
policy funding priorities, resources should be focused on the
poorest regions and Member States, but is important for the rest
of the EU to tackle issues like creating skills and jobs and environmental
degradation, and transitional support would avoid an economic
shock due to a sudden drop of funding;

Member States and regions should focus on a limited
number of agreed priorities to maximise impact of cohesion spending,
more developed regions could be required to focus their funds
on two or three priorities, while less developed regions could
focus on a slightly wider range of priorities, the Europe 2020
strategy should strengthen delivery by adopting a common strategic
framework outlining how objectives translate to investment priorities
and this framework would replace the current approach of separate
sets of strategic guidelines for policies;

a Development and Investment Partnership Contract,
between Members State and the Commission, would set out objectives,
how progress is measured and the allocation of EU and national
resources to priority areas  the result of the contract
would be to link the potential allocation of resources at national
and EU level;

allocation of financial resources should take
into account the capacity of Member States and regions to effectively
utilise the funds and respect the principles of co-financing and
additionality  to improve the quality of spend, cohesion
policy could invest institutional capacity or promote administrative
reform or, alternatively, a small share of cohesion funding could
be set aside as a performance reserve, allocated on the basis
of progress to Europe 2020 strategy objectives;

in relation to skills, the European Social Fund
promotes inclusion alongside growth through innovative approaches
to employment, training and social inclusion  the fund
could be refocused on securing Europe 2020 strategy objectives;

the European Globalisation Fund, currently used
to tackle localised negative effects of economic structural change,
should be simplified to become more reactive to changes of economic
circumstances and could be put on a more permanent footing;

noting that for citizenship, EU action covers
promoting fundamental rights and EU values amongst others, action
could include fostering access to justice in the EU and promoting
mutual recognition in criminal proceedings;

also in relation to citizenship, the EU Solidarity
Fund, whilst demonstrating limitations and weaknesses, is a tool
to respond to situations of crisis, and it is not funded on a
permanent footing and funds are reallocated from unspent funds
in previous years  a budget contribution would increase
the effectiveness and responsiveness of the fund;

finally on citizenship, pooling resources and
burden sharing between Member States can be a cost effective method
to supporting effective border management;

asserting in relation to "Global Europe"
that EU citizens expect the EU to promote its interests and exert
its influence on the international stage, which the new structures
for external relations under the Lisbon Treaty should facilitate,
other areas of important EU involvement are improving the EU's
ability to respond to crisis situations, combating global poverty
(citing clear evidence that development policy at EU level offers
high added value) and fostering close and effective relations
with the EU's closest neighbours, including comprehensive free-trade
agreements  greater use of blending mechanisms can benefit
from a multiplier effect, increasing resources for development
goals, and budgetary inflexibility can hamper attempts to sustain
the EU's humanitarian interventions; and

noting that it been operating a policy of zero
growth to staff numbers since 2007 (other than posts related to
enlargement and the European External Action Service), its administrative
resources must be made to work better, including savings from
back-office functions such as IT, translation and document management,
and it will review its administrative budget as part of preparations
for the next Financial Framework.

4.10 In the next section the
Commission discusses delivering results, saying:

leveraging investment is an area of genuine EU
value added;

partnership between EU funds and private capital
should become the norm for longer-term projects, with European
Investment Bank and European Bank for Reconstruction and Development
involvement;

commercial investors would only support those
projects which demonstrate real EU added value and which address
market failures;

infrastructure projects could also be a source
of revenue for the EU budget, for instance through road tolls;

EU project bonds would use EU Budget funds to
bolster market confidence and improve the credit-worthiness of
major EU-level projects, with a view to repaying the money to
the EU Budget once the projects reached viability;

large-scale projects such as Galileo and
the International Thermonuclear Experimental Reactor (ITER) can
be subject to budgetary uncertainties  given their long-term
commercial vocation, they could be better managed by a separate
support entity;

the EU Budget could make regular and predictable
budgetary contributions, with no assumption that it should make
up any shortfalls;

in line with the current debate on economic governance,
the EU Budget could impose conditions to ensure effective delivery,
such as setting aside an EU-wide reserve or adjusting rates of
co-financing in line with performance  clear and transparent
evaluation criteria would be required;

the EU Budget structure is a vehicle for reflecting
and communicating broader EU-level priorities  the current
system of budget headings could therefore be revisited;

the current seven-year Financial Framework could
be reduced to five years, to better reflect the mandates of the
Commission and the European Parliament, but the Commission believes
the most attractive option is a ten-year period, with a major
review after five years;

in relation to responding to changing circumstances,
the EU Budget needs to strike a balance between predictability
and flexibility;

a compulsory margin of 5% below Financial Framework
ceilings could be considered, greater flexibility could also be
achieved via transfers between headings, transferring margins
from one year to another, greater use of front or back-loading
of spending and changes to the Flexibility Instrument or Emergency
Aid Reserve;

also the current 0.03% flexibility arrangement
allowing limited deviations should be maintained; and

in the context of simplifying and minimising
unnecessary administrative burdens, implementation of the EU Budget
should combine effective spending with low administrative burdens
for recipients;

a clear set of common principles could be considered,
in the context of recent proposals to revise the Financial Regulation;[23]

strict budgetary control should also be balanced
with effective spending;

more can be done to improve financial management,
including implementing more local controls; and

further changes will be required if the Commission
seeks to channel more funds through financial instruments.

4.11 In the fifth and sixth sections
of the Communication the Commission touches briefly on the EU
Budget as a tool to support economic governance and taking account
of enlargement, saying that:

it believes it is natural to make a connection
between economic governance and the EU Budget because macroeconomic
stability and structural reforms reinforce each other; and

the next Financial Framework should not pre-empt
any decisions on future enlargements of the EU.

4.12 In the next section the
Commission discusses EU financing, saying that:

in recent times Member States have tended to
focus more on net positions than on EU added value;

current arrangements for financing the EU Budget
are opaque, complex and lack fairness;

introducing a new resource could mean that existing
resources are phased out;

contributions should be simplified, including
the phasing-out of correction mechanisms  although correction
mechanisms may remain justified in the future on the basis of
compositions of expenditure and reforms of the Own Resources system;

Own Resources based on VAT are perceived as being
more complex than those based on GNI; and

a policy-driven own resource could derive from
EU-level taxation on the financial sector, revenues from the Emissions
Trading Scheme, air transport charges, VAT, energy taxation or
corporate income tax.

4.13 In the final section of
the Communication the Commission asserts that the EU and national
budgets should be seen as complementary and not in competition
with one another and that EU funding should be rational and fair,
and perceived as such. It says that it will bring forward a draft
Regulation setting the next Financial Framework and a draft Decision
on Own Resources in June 2011.

4.14 The Staff Working Document accompanying the
Communication includes technical annexes on:

the main results of the public consultation on
the Budget Review;

a description of the evolution of the EU Budget;

an inventory of the flexibility instruments available
to reallocate funding;

data on developing trade and the internal market;

a summary of studies of the impact of cohesion
policy expenditure on Member States and the EU economy 
praising impacts over the 2000-2006 period;

a typology of the EU financial instruments;

results of a 2008 study of policy and programme
evaluations;

a description of actions taken by the Commission
to improve financial management; and

a qualitative and quantitative assessment of
the new own resource proposals included in the Communication.

Points in this last annex are;

the list in the Communication is intended to
be seen as an illustration of some issues that need to be considered;

the assessment is most favourable towards aviation
taxes and Emissions Trading Scheme auctions to make up a new own
resource, whilst relatively unfavourable about financial transaction
taxes and an EU corporate income tax; and

the EU economy has changed dramatically since
the current Financial Framework was agreed in 2005;

the EU Budget has failed to adapt to these new
and challenging conditions;

consequently, it is now a much larger share of
EU income than anticipated when the current Financial Framework
was agreed, owing to a fall in EU income growth below forecast
levels;

the EU Budget must become more affordable;

the Government has continued to fight hard in
the 2011 EU budget negotiations to reject the Commission's and
European Parliament's calls for a 6% increase above 2010 levels
and to ensure a budget more in line with the difficult economic
climate across the EU;

it believes the next Financial Framework should
be smaller in real terms than the current one; and

the Budget Review provides an opportunity to
support this objective.

4.16 In more detailed comments
the Minister says that:

the Government welcomes the Commission's acknowledgment
of the need for reform of the EU Budget to support the Union's
priorities  in particular economic growth;

it is, however, disappointed that the Communication
does not have a strong focus on prioritisation and identifying
where savings can be made;

in line with its overriding objective of deficit
reduction, the Government's priority when approaching the EU Budget
is to reduce budget size;

it will defend the UK's abatement, which remains
fully justified because of distortions to EU spending that cost
the UK;

all budgetary proposals will be considered in
the context of these priorities;

noting that the document introduces a broad range
of policy proposals currently at the idea stage and contains little
detail; this means that the content can be read with different
interpretations depending on perspective;

for the majority of the proposals the document
does not put forward a clear Commission view;

the Government is pleased to see that the document
focuses on growth as a key challenge and welcomes references to
the Europe 2020 strategy aims of increased competitiveness, greater
employment and faster growth being embedded in expenditure objectives
across all areas of the EU Budget;

it believes, however, that the EU Budget should
only act where expenditure is the appropriate policy lever 
many objectives of the Europe 2020 strategy can be achieved without
expenditure, for example, deepening the single market or advancing
the better regulation agenda;

the Government agrees that the EU Budget needs
to be reprioritised, with a greater proportion spent on supporting
growth and competitiveness, tackling climate change and tackling
global poverty;

budget spending on research and innovation has
EU value added by achieving economies of scale through a 'critical
mass' of combined equipment or knowledge and internalising the
spillover benefits of EU public goods, such as new low carbon
technologies;

supporting research and innovation makes a significant
contribution to growth and competitiveness;

therefore the Government agrees that this is
an important area to continue budgetary support;

it supports a focus on energy and transport infrastructure
where EU Budget action has a role in addressing pan-Union market
failures  in particular the Government believes this is
an area where loan financing can play a greater role, such as
by the European Investment Bank;

the Government supports the Commission's strong
focus on the role that the EU Budget can play in achieving its
energy and climate change goals;

the Government believes it is important to provide
the right type of funding to support and facilitate energy technology
and infrastructure development and energy efficiency;

it also believes the budget has a role to play
in meeting the EU's external climate and energy goals where there
are significant EU externalities;

it is interested in the conclusion that funding
for energy and climate objectives should be mainstreamed throughout
the EU Budget  this seems like a good approach in general
terms, but the Government would need to consider in more detail
how this would impact on specific policy areas;

the Government supports an active role for the
EU as a global player to address key global challenges;

it believes the EU Budget has a role to play
in supporting the areas highlighted by the Commission in its passage
on "Global Europe"  poverty alleviation, migration,
terrorism, organised crime and conflict-affected states;

external expenditure should have a clearer focus
on priorities areas but must be subject to improvements in effectiveness
and outcomes;

the Government is supportive of proposals to
use EU financing instruments to leverage and stimulate private
investment  it supports a greater use of European Investment
Bank lending in place of EU grants, helping to increase value
for money and efficiency and to maintain activity while pursuing
consolidation of the EU Budget overall, and the idea of EU project
bonds merits further consideration;

proposals intended to improve the EU budget's
ability to deliver results, including options on incentive reserves,
structure of the budget headings, duration of the Financial Frameworks,
a new structure for supporting large projects and flexibility
in allocating funds, are floated at a high level without significant
detail;

it is the detail that will determine whether
proposals support the objective of a smaller budget and budget
discipline  the Government is willing to consider further
detail on the proposals, however it is important that discussions
of these issues do not distract from more important and pressing
issues of prioritisation and reform;

the Government wants to see development of a
competitive, thriving and sustainable EU agriculture and food
sector and is supportive of the further development of efficient,
responsive international agricultural markets;

the Union needs an EU farming sector that is
able to rise to the challenges and opportunities of the future,
tackling climate change and meeting increasing global demand for
agricultural commodities;

the Government agrees with the Commission's observation
that Common Agricultural Policy expenditure could continue to
reduce  the policy accounts for over 40% of the EU Budget
and much of this expenditure is extremely poor value for money;

the Common Agricultural Policy budget must be
affordable, meaning that it will need to fall substantially over
the period of the next Financial Framework;

the Government therefore welcomes the Commission's
acknowledgement of the scope for radical reform;

it hopes that the Commission's Communication
on the Common Agricultural Policy[24]
gives full consideration to the options for following through
on the competitiveness agenda and for securing radical reform;

the Government supports a greater focus by the
Structural and Cohesion Funds in helping the poorer regions to
catch up with the EU average, where EU spending can significantly
add value  receipts in richer regions, particularly in
wealthier Member States, should fall significantly in the next
Financial Framework;

the Government believes that Member States should
have greater freedom to ensure that the Structural and Cohesion
Funds both support Member States' own policies and are aligned
with their own delivery mechanisms;

given this, the Government is concerned by proposals
that would hinder this flexibility  top-down compulsory
objectives and/or ear-marking of expenditure;

the Government agrees on the need to strike a
balance between simplification and sound financial management
and it also agrees that incentives and checks must be put in place
to ensure spending fulfils its real purpose;

in this context, the recommendation for a more
differentiated approach to the controls required in individual
Member States should be explored further;

any sanctions that arise from the measures to
reform economic governance do not apply to the UK by virtue of
the provisions in Protocol 15 TFEU and the UK's opt out from membership
of the single currency;

the Government welcomes the reiteration of the
principle of fairness set out at the 1984 Fontainebleau European
Council, at which the UK abatement was agreed;

the Commission underscores that expenditure policy
is a key source of budgetary imbalances and notes that correction
mechanisms may be justified in future Financial Frameworks, depending
on the composition of EU expenditure and Own Resources; and

the Government will not support a new EU tax
to fund the EU Budget  it believes taxation is a matter
for Member States to determine at the national level.

Conclusion

4.17 Although, as the Minister
says, what exactly the Commission intends to propose for the future
of EU finances is not yet clear, we think a debate in European
Committee B about the ideas floated in this Communication would
be timely and we so recommend.